Challenges ahead for auto insurance industry
Recently, financial analysts and publications reported that Google is about to fundamentally disrupt the auto insurance industry1. Whether the reports are true or not, there is no doubt that start-ups entering the auto insurance industry have intentions to do so. Start-ups around the world are disrupting industries by tailoring products and services to their customers. The new entrants to the auto insurance industry are moving in the same direction, by tailoring insurance products and premiums to clients’ needs and behavioral parameters. In this note, we briefly describe why traditional auto insurers, who are accustomed to selling standardized products at premiums based on historical statistics relying on few demographical and geographical parameters, should embrace these changes. We also highlight some successful solutions already tested by a few insurance companies, which can be significantly scaled.
Direction of the Auto Insurance Industry Does Not Favor Traditional Insurers
As described in a recent White-Paper published by the French think-tank The Family, the disruption of an industry by new digital entrants typically follows a 5-stage progression:
Looking at the latest trends within the auto insurance market, it’s becoming apparent that the insurance industry is currently entering the “Power-Balance” stage, also called the “Napster moment.” Incumbents are reluctant to change their business-model and prefer launching minor digital initiatives, or relying on regulatory barriers and lobbying to keep the status quo. “Crowd Enlightenment” has already taken place in this industry, leading to the emergence of new entrants downstream of the value chain, such as aggregators.
Although many insurance companies have launched initiatives, such as mobile applications, or developed a social network presence, only a small portion of these companies have really embraced the digital revolution. Most of the traditional auto insurance industry is not ready for a paradigm shift towards customer-centricity.
However, Progressive, one of the largest auto underwriter in the US, has been wildly successful with its well-known and heavily advertised Snapshot program. The Snapshot program uses telematics-based UBI, which tracks the driver’s mileage as well as their driving behavior. The Snapshot program would be a top 15 underwriter alone, already accounting for 2 billion dollars in premiums and 2 million customers.
Some Solutions Already Tested by Insurers Could Be Significantly Scaled-up
Usage-Based Insurance (UBI)
Usage-based insurance is a comprehensive name for various kinds of offerings which are not equally performing: Pas As You Drive (PAYD), Pay How You Drive (PHYD) and so on. Business models behind these types of offerings are still emerging and dependent on various goals, including mileage control, driving behavior control, car fleet management and vehicle-sharing. Usage-Based Insurance is already a well-known solution tested by many insurers. According to SMA Research, approximately 36 percent of all auto insurance carriers are expected to use telematics UBI by 2020.
To be truly effective, and endorsed by consumers, these offers have to rely on “state-of-the art” technology (developed internally or by a 3rd party) and be intensively promoted, like Progressive’s “Snapshot Program,” even at the cost of cannibalization. In addition, these types of offers are still facing challenges in terms of acceptance and regulation. As highlighted in the recent White Paper on UBI published by the NAIC3 (National Association of Insurance Commissioners), Regulators are working on the potential implications of such programs, since there are risks that telematics could turn into “another black box trusted by few people” due to a lack of transparency in how the collected data is used to calculate the scores and the related prices paid by consumers.
Product bundling consists of offering customers a core insurance product packaged with options and ancillaries, depending on their life-styles, behaviors or identified needs. This technique, used in many industries, such as the hospitality or telecommunication industries, enables insurers to offer adapted options that may not have been initially considered by the customers. If the packages are successful in fulfilling customers’ needs, it saves customers time and increases profits for insurers. In practice, most of the insurer’s profits rely on the sales of the options, rather than the core product. Insurers hope these offers will lead to an increased satisfaction rate for customers, and increased profits and customer loyalty for them.
Finally, on the claims side, existing technology can be leveraged to improve the customer experience when facing an insurance claim. The latest embedded technology built by car manufacturers and technology companies, such as Microsoft Sync, Apple Car Play or Android Auto, should enable insurers to streamline the risk prevention, motor claims and repair processes. To do so, partnerships and alliances between various stakeholders may be necessary, and internal processes may be fundamentally disrupted, leading to necessary alignment with existing structures. Such practices have already begun, for example, National General’s telematics UBI program uses General Motor’s OnStar connectivity to confirm miles driven.
To conclude, we believe that in a context of significant pressure from digital transformation, the priority for auto insurers is to review their business model in order to be in a good position for competing with any potential “digital” new entrants/new models. In the full version of this article we provide a more complete view on these challenges and how we could help.